Venture investors returning to their desks in 2023 with plans to double down on web3 might want to heed a new warning from legendary investor Fred Wilson.
"While there are compelling values out there in web3, I am not convinced that it is safe to go back into the water just yet unless you have a very strong stomach and a very long time horizon," said Wilson in a Jan. 1 blog post.
Wilson is a veteran tech investor known for his own strong stomach. He's taken early bets on companies such as Twitter, Coinbase and Etsy through Union Square Ventures, a venture firm he co-founded in 2013.
In early 2022, Wilson's firm quietly raised $625 million across two new funds to invest in both web2 and web3. The firm has both early stage funds that focus on seed and Series A investing as well as opportunity funds that focus on mature businesses.
Over the course of 2022, the web3 ecosystem experienced a number of controversies from costly hacks to several high profile bankruptcies — including the collapse of prominent exchange FTX. These controversies were in addition to the headwind of a challenging macro environment that hit the broader tech ecosystem, such as surging inflation and rising interest rates. This caused many startups to implement cost saving measures including widespread layoffs.
"I understand that this year has been painful for most and devastating for many. I am not immune to it," said Wilson in a blog post reflecting on 2022. "Our family’s net worth has taken a massive hit. The carrying value of USV’s assets under management has been cut in half this year."
The series of unfortunate events have led to valuations plummeting for web3 companies across the board, yet it still hasn't been enough to wet Wilson's appetite. Web3 still has a "much larger overhang" compared to the broader tech sector, he said.
"There are entities that are insolvent but have not been restructured," Wilson said. "There are funds that are so far under water that they may be forced to liquidate. These kinds of activities will produce ongoing sell pressure on web3 tokens for at least the first quarter of 2023 and maybe for much longer."
A new normal
It's not just web3 startups that will experience pain. Wilson also expects to see more failures from tech startups with issues surrounding unit economics, product market fit or their leadership teams. Many have taken longer to fail because the significant amounts of capital raised in the bull market of 2021, Wilson said.
Broadly the tech market will return to a new normal that is similar to 2015, Wilson said, noting that seed rounds will be done at the $10 million range; Series A rounds will be done around $15 million to $25 million and Series B will be done at $25 million to $50 million range.
The Block Research team said that valuations appeared to be normalizing in Nov. 2022 with most pre-launch projects raising at a $20 million valuation range. The average check size was $4.7 million in November for seed stages.
Betting on ethereum
It's not all doom and gloom for web3, however. Similar to Wilson's views on the broader tech market, he expects web3 startups that can demonstrate strong product market fit and tokenomics will still garner interest from investors, particularly those exposed to "large caps in web3" such as bitcoin and ether.
"I am more bullish on ETH personally because it has the best underlying economic model of any web3 asset," Wilson said.
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